THE LIBOR RATE AND THE PRESUMPTIVE INTEREST

The need for a uniform measure of interest rates across financial institutions became necessary when the market for interest rate-based products began to evolve during the 1980s.

In this context, the Libor rate has been used as a reference interest rate to set the price of loans and derivative products around the world.

However, its use has been questioned, especially since the “LIBOR scandal” that occurred in 2012. According to some information, the main banks conspired to manipulate LIBOR rates to keep them low and in this way generate greater profits for their users. who held positions in financial securities.

Many major financial institutions were implicated in the scandal, including Deutsche Bank (DB), Barclays (BCS), Citigroup (C), JPMorgan Chase (JPM) and Royal Bank of Scotland (RBS).

This has generated serious doubts regarding the validity of LIBOR as a reference rate, such that its use is being gradually eliminated in the world during the year 2023.

Peru is no stranger to these changes. Since 2021, the Superintendency of Banking, Insurance and AFP (SBS) has recognized that this situation posed challenges to the supervisor and the supervised systems – financial, insurance and private pensions – due to the difficulties that may arise in the adequacy of the contracts in force at the new rates, the problems of adequacy of the systems, the lack of deadlines for some products and the adjustments that must be made to the asset valuation methodologies.

The main products associated with LIBOR are rate swaps, cross currency swaps, non-retail credits and subordinated debt issues. Regarding maturities, the products focus on 3-month and 6-month LIBOR calculations.

Taking this panorama into account, tax regulations could not help but catch up with the use of the LIBOR rate.

In that sense, with the publication of Legislative Decree No. 1545 on March 15, 2023, article 26 of the Income Tax Law was modified. This article refers to the presumed interest on loans. Before the update, it was indicated that for operations in foreign currency the reference rate to determine the presumed interest was the average six (6) month deposit rate of the London exchange market for the last calendar semester of the previous year. Now the new text of the standard establishes the following:

[…] In the case of loans in foreign currency, it is presumed that they accrue an interest no less than the monthly average active market rate in foreign currency (TAMEX) published by the Superintendency of Banking, Insurance and Private Pension Fund Administrators multiplied by a factor of adjustment […].

As can be seen, reference is no longer made to the London interbank market but to the TAMEX published by the SBS. This is applicable in the case of natural or legal persons domiciled in the country. It should be noted that this modification of article 26 will come into force on January 1, 2024.

On the other hand, it was necessary for tax regulations to be pronounced regarding loan operations with non-domiciled individuals.

Subsection a) of article 56 of the Income Tax Law, whose Single Ordered Text was approved by Supreme Decree No. 179-2004-EF, establishes that the income tax of legal entities not domiciled in the country, Regarding interest from external credits, it will be determined by applying the rate of 4.99%, provided that the credit does not accrue an annual interest upon rebate higher than the prevailing preferential rate in the place from which it comes, plus three (3) points and, in In the case of cash loans, the entry of foreign currency into the country is also accredited.

In turn, paragraph j) of said article provides that the aforementioned tax, with respect to the part of the interest derived from external credits that exceeds the maximum rate indicated in the previous considering, will be determined by applying the rate of 30%.

Furthermore, subsection c) of the first paragraph of article 30 of the Regulations of the Income Tax Law, approved by Supreme Decree No. 122-94-EF, provides that, for the purposes of applying the rate at which paragraph a) of article 56 of the Income Tax Law refers, it will be taken into account that, in the case of credits obtained in the American market of the United States of America and in the market of the European continent, the prevailing preferential rate is considered at the LIBOR rate plus four (4) points.

Consequently, it is necessary to regulate the new predominant preferential rate referred to in paragraph 2 of paragraph a) of article 56 of the Income Tax Law, taking into account the discontinuity of the use of the LIBOR rate.

For this reason, on June 29, 2023, Supreme Decree No. 137-2023-EF was published in order to establish the new predominant preferential rate.

The modification of article 30 of the Regulations of the Income Tax Law is as follows:

Article 30.- RATES APPLICABLE TO NON-DOMICILIED LEGAL PERSONS
For the purposes of applying the rate referred to in paragraph a) of article 56 of the Law, the following will be taken into account:

(…)
c) The predominant preferential rate is considered to be the average thirty (30) day SOFR rate plus four (4) points, regardless of the place from which the credit comes, the currency or the agreed maturity period.

(…)
f) The comparison of the external credit rate with the prevailing preferential rate plus three (3) points will be made only when the credit interest rate is agreed, modified or extended.

(…)
The rate established in section j) of article 56 of the Law will be applicable to the amount of annual interest if it exceeds the prevailing preferential rate plus three (3) points.

With these modifications in the fiscal aspect, Peru is in line with the main world markets in not using the LIBOR rate.

Isaac Rojas Bojorquez
Tax Supervisor
Russell Bedford Peru